June 14, 2011, 5:41 p.m. EDT
How to profit from the coming Greek default
Commentary: Five trades to make before the euro implodes
LONDON (MarketWatch) — You don’t exactly need a crystal ball to know what the biggest event in the financial markets of the next 12 months is going to be: Greece defaulting on its debts.
This week Standard & Poor’s cut its rating on the country to CCC, the lowest of any nation in the world. Only last week we learned that Greek industrial production was down 11% year-on-year. Unemployment has risen 40% over the past year, and now stands above 16% nationally. A year on from the European Union and International Monetary Fund “rescue,” Greece is slipping into 1930s-style depression. A country in that kind of a fix doesn’t pay back debt. Nor does it get its deficit under control. It isn’t a question of whether Greece defaults anymore. Everyone accepts that. It is simply an issue of when, by how much, on what terms — and, perhaps most crucially of all, who gets stuck with paying the bill.
In reality, it is already priced in. And the Germans and the French aren’t going to let it happen until they know their banking systems are safe — so there isn’t going to be a Lehman-syle collapse.
What a Greek default will do is focus everyone’s mind on the breakup of the euro. Once countries go broke, the euro will have taken a decisive step towards dismemberment. The markets will start figuring out who the winners and losers are from that — and pricing that in as well.
So if the euro isn’t going to be around in five years time, how do you position your portfolio for that?
Here are five trades you should start thinking about:
1. Buy German bunds, and sell the DAX index /quotes/zigman/2380246 DX:DAX -0.25% . The new deutsche mark that will emerge from the wreckage will be one of the strongest currencies in the world. That will be great for German bonds, but bad for the country’s mighty exporters, whose shares are the leading constituent stocks of the blue-chip DAX index. Over time, German companies will learn to adjust to having a strong independent currency again. They coped with it perfectly well in the 1970s and 1980s. But it will take time — and exports will suffer in the meantime. That will be bad for profits, and bad for share prices.
2. Sell the Swiss franc /quotes/zigman/4868123/sampled USDCHF -0.01% . Investors have been piling into the franc because they don’t have the deutsche mark as a safe haven anymore. The Israeli shekel /quotes/zigman/4867989/sampled USDILS +0.01% has some supporters — including this writer — as a currency that’s going to appreciate through bad times as well as good, but it doesn’t have a thousand years of peace and prosperity behind it the way the Swiss franc does. So right now the Swiss have that market to themselves — as the strength of the franc makes clear. But with the deutsche mark back in business, a big chunk of that safe-haven money will shift back across the border. The Swiss franc will be on the way down again.
3. Sell the Belgium index /quotes/zigman/627399 XX:BEDOWD -1.01% . As the European Union grew in power, Brussels emerged as the capital of a nascent super-state that for a time seemed able to rival the United States. Every big company needed a platoon of well-paid lobbyists taking people out for expensive lunches. With the euro on the rocks, the EU will be halted in its tracks, and all of that will disappear. Brussels will just be a place where you can buy some nice chocolate while changing trains. The country’s economy and its leading companies will all suffer.
4. Buy European travel companies. With the euro gone, the peripheral nations will see their currencies fall dramatically, while the core will see theirs appreciate. One consequence will be that it will be dirt-cheap for northern Europeans to go on holiday in Greece and Spain and Portugal again. A traditional pattern of trade will emerge. Northern Europeans make luxury automobiles and machine tools for the world, then two or three times a year relax by sitting by the Mediterranean for a couple of weeks enjoying themselves and spending all that money they earned. That will be great for everyone involved in shifting people from place to place — the tour operators, the airlines, the aircraft manufacturers, and the travel websites. All of them will see their profits soar.
5. Sell the U.S. banks /quotes/zigman/311044 XX:GSPFI -0.52% but buy the dollar /quotes/zigman/4867933/sampled EURUSD +0.06% . If everyone knows Greece will have to default, what’s keeping them from pulling the plug? That’s easy. The Germans and the French won’t want to ‘re-profile’ all that Greek debt until they know their banks /quotes/zigman/116452/quotes/nls/eufn EUFN -4.48% have largely sold both the debt and the credit-default swaps associated with it to someone else. They aren’t stupid — they aren’t about to blow up their own financial system. Who’s bought it? It looks as if the U.S. banks have wound up owning a lot of Greek debt. The Asian /quotes/zigman/116464/quotes/nls/fefn FEFN +0.61% and Middle Eastern banks may have a lot as well. When the default happens, they will be the ones who take the brunt of the losses.
The dollar will gain, however. The euro was a serious contender to take its place as the global reserve currency. With that out of the picture, the dollar will get another decade as the main currency of global trade. Its weaknesses will catch up with it eventually — but the day of reckoning will have been postponed.
There will be plenty of other consequences. Spain will be looking shaky. Italy may recover from what has been, in effect, permanent recession since it joined the euro. But those five trades should at least be enough to let you join the Germans and the Dutch on one of those dirt-cheap vacations in Rhodes or the Algarve.
Great blog, by the way.
ReplyDeleteWhy do you think the Euro will collapse? I'll give you Greece's default, but why would that lead to the collapse? Its rather clear to me that Bernanke and/or China won't let that happen. After all, as you talk about, the collapse of the euro would basically be a prolonged recession in Europe--- cutting off China's biggest trade partner. I imagine we'll see them put that surplus of theirs to work.
That is a great question.
ReplyDeleteWell Bernanke, the IMF, and/or China may try to avoid a default, but remember the government can only postpone the inevitable.
With countries as Spain and Portugal with over 20% unemployment, and situations like the one in Greece makes it very hard that a turn around is possible. Their economies just aren't functioning well.
If you were in Europe at the time the Euro took over you would know that regular folks hated it.
They still do. Most regular people will tell you to hell with the euro - look the misery it brought us.
There is the economic factor, the psychological factor, and the fact that the 99% of the people will take only so much from the government.
For capitalism to work you have to let the markets order themselves. If they continue to bail banks, and governments out - how long do you think the inevitable will occur?